Clover plans to expand further into Africa

Johann Vorster.
Photographer: Martin Rhodes

Image source: Financial Mail

It raises prices, knowing this will result in volume and market share losses. It's a successful approach, with the dairy producer's strong brands and infrastructure soon recapturing lost volume and market share.

But how much longer can it keep working? There are already tentative signs of looming weakness.

Key financial indicators from Clover included a 69% increase in Heps to 173,6c, operating profit up by 80,3% to R509,1m on the back of an operating margin that firmed from 3,3% to 5,5%, and the resulting 75% increase in total dividend payments to 56c/share.

The only line that could be questioned is the 60% drop in cash flow to R160,2m, but it's not a milk truck smash for Clover, as it reflects increased working capital requirements.

But behind the strong results is the oft repeated words of CE Johann Vorster: "The increase in prices and profitability resulted in volume and market share losses in some product categories, as anticipated."

He says selling prices rose considerably at the end of the previous financial year due to high cost inflation.

What is encouraging is that Clover seems to have serious plans for expansion further into Africa. Executive management was criticised in the August issue of Investors Monthly for talking a lot about such expansion but doing relatively little about it.

Now big events might be taking place (see table). Proposals are still at the discussion stage and have not been confirmed, but they could include the spending of around R470m on African expansion. Targets are apparently in Angola, Nigeria and other parts of East Africa, which must include Kenya.

The really big one, though, is a proposal to build an R890m megafactory near Estcourt in KwaZulu Natal. Vorster says this would boost exports to the rest of the continent. "The sad thing about SA is that we have to cut milk prices every three, four years to keep volumes in check. The infrastructure is just not there to export," he says.

If the megafactory goes ahead, it should solve the export crisis. It could also be good business for Clover if the company allowed other producers to use the export infrastructure, as it does for some fast-moving consumer goods companies through its large chilled-distribution network near Durban. It could charge clients a tidy sum for doing this.

One question that has been asked is what would happen to Clover's strategy if consumers could no longer afford the price increases. There's a sign that this is happening in the fruit juice section. "A continuing weak volume performance in the beverages segment reflects the reduction in consumers' discretionary spend evidenced by overall market contractionin the fruit juices category," Vorster says.

After a somewhat lacklustre increase of only 2,7% in the share price over the past year, Clover is on an attractive forward p:e of about 10. But investors don't seem to be biting. In fact, the share price lost 6,65% last week to close at R17,55. That is taking the price down towards its low for the year of R16,67.

This could all change if the expansion projects further into Africa go ahead. But until something definite is confirmed the share remains a hold, which is the call of a number of investment analysts.

The company does have institutional investor support, though, including that of major shareholders Allan Gray Asset Management and Kagiso Asset Management

Clover could be a buy for nervy investors on the assumption that Africa expansion will go ahead. But that's a risky call.